Vol 3. | Issue 1. | March 2008

South Dakota Puts
Incentives To Work For Wind
Tax incentives introduced this year in South Dakota could help the state catch up to the highly successful wind energy markets of neighboring Midwestern states.

By Jennifer Delony
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Ranked fourth in overall wind generation potential for U.S. states by the American Wind Energy Association, South Dakota has yet to break the 100 MW mark in installed wind energy capacity. Wind energy development in neighboring states, by comparison, has skyrocketed ahead of South Dakota. Minnesota and Iowa - ranked ninth and tenth, respectively, in potential - are neck-and-neck in third and fourth place, respectively, for total installed capacity with nearly 1,300 MW each. South Dakota, however, could begin to close the gap between its installed capacity and the capacities of its Midwest neighbors with new tax incentives for wind energy facilities and community-based energy development (C-BED).

A bill to provide tax incentives for wind energy facilities and related transmission – House Bill (HB) 1320 – was introduced in the South Dakota legislature in January at the request of Gov. Mike Rounds, R-S.D., and passed the House and Senate easily. According to the governor's office, Rounds will sign the bill when he receives it.

The incentive, which builds on existing wind energy tax legislation, bases annual taxes for wind farms in South Dakota with a commission date of July 1, 2007, or later, on their capacity and generation. One annual tax - calculated by multiplying $3.00 by the number of kilowatts a wind farm can produce (i.e., nameplate capacity) - would be in lieu of taxes on personal and real property, but not in lieu of other taxes, such as retail sales and service tax. The bill also sets a separate annual tax at 2% of a wind farm's gross receipts. This tax, according to the bill text, is based on a wind farm's "annual production of electricity in kilowatt hours multiplied by the South Dakota electricity base rate of $0.0475 per kilowatt hour in 2008, with the rate…increasing by 2.5 percent on an annual basis."

A separate bill - HB 1296 - would support a C-BED model for renewable energy that has received generous legislative and social support in Minnesota, which leads the country in installed C-BED capacity. Introduced in January and currently under review in the House Taxation committee, HB 1296 would entitle C-BED projects to a refund or credit for sales or use tax. The incentive is available to a project only if at least 25% of its owners are individuals or entities residing or headquartered within a 50-mile radius of the project. The bill stipulates that no owner can hold more than 15% of the project and no more than 75% of payments from power purchase agreements may go to nonqualified owners.

National Wind, a Minneapolis-headquartered wind energy developer with a focus on community-based ownership in the Midwest, welcomes the new incentives.

"One of the reasons that we had not ventured into South Dakota until now is that the benefits that some neighboring states offered already made South Dakota look somewhat less attractive," says Jack Levi, co-chair of National Wind. "This type of tax incentive is exactly what's needed."

National Wind announced in December 2007 that it would enter the South Dakota market with a private-equity investment from a South Dakota fund managed by McGowan Capital Group. Its first wind project in the state, launched under Dakota Wind Energy LLC, would have a potential generating capacity of 750 MW and span 700 square miles.

"We have a rather ambitious project at 750 MW," says Levi. "Typically, community projects are a few landowners that get together and put up a few turbines, but we have come to the realization that a lot of these projects - unless they can reach a critical mass of 100 MW to 200 MW - are no longer economically viable in delivering the power at a price that the utilities are interested in."

Even if the price is right, developers in South Dakota may not be able to find offtakers for their wind energy without a mandate for renewable energy purchases that is similar to mandates set by law in Minnesota and Iowa. A bill that would have required South Dakota's utilities to obtain 3% of their power from renewable resources by 2012 was introduced to the South Dakota legislature in January, but failed to garner approval in the House State Affairs committee. The committee struck the requirement in toto from the bill.
 
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